US consumption binge rolls on + China growth downgrade
In this Daily: - US Macro: Consumption continues to defy gravity – Retail sales unexpectedly rose by 0.7% m/m in August, contrary to expectations for a fall (consensus: -0.7%; ABN: -1.5%); - China Macro: Downgrading our 2021 growth forecast on Delta – Over the summer, Beijing's zero tolerance approach towards new (Delta) outbreaks formed a clear headwind for economic activity, with the services sector particularly affected
US Macro: Consumption continues to defy gravity – Retail sales unexpectedly rose by 0.7% m/m in August, contrary to expectations for a fall (consensus: -0.7%; ABN: -1.5%). While car sales continued to decline from still-lofty levels – they are now ‘only’ 15% above pre-pandemic levels, compared to 34% higher back in April – this was more than offset by a renewed rises in online sales, which jumped 5.3% m/m, as well as home improvement and furniture, likely linked to the ongoing housing boom. Interestingly, although eating out is now back to well above pre-pandemic levels (+8.7%), grocery sales also surged, and as of August are some 16% above pre-pandemic levels. This is surprising, as we expected grocery sales to have fallen back to more normal levels by now.
The continued strength in goods consumption comes despite the hit to incomes from the withdrawal of generous unemployment benefit top-ups, which by August had already extended to around half of US states. It could well be that consumers are dipping into their substantial excess savings to make up for the hit to incomes, although the evidence suggests excess savings have mostly accrued to high income groups who are likely unaffected by the benefits withdrawal.
In any case, we do not view this level of goods consumption as sustainable over the medium term, and that the inevitable correction is merely delayed. High frequency indicators suggest the Delta wave of covid infections has taken a toll on the services recovery, but with this now peaking, we expect services to regain momentum, and this should aid the shift away from goods consumption. This would be a healthy development for the US economy, given the ongoing global supply-chain bottlenecks affecting goods production, which is continuing to pose upside risks to the inflation outlook. For now, however, the goods consumption binge rolls on. (Bill Diviney)
China Macro: Downgrading our 2021 growth forecast on Delta – Over the summer, Beijing's zero tolerance approach towards new (Delta) outbreaks formed a clear headwind for economic activity, with the services sector particularly affected. The tightening of mobility restrictions and the re-imposition of regional lockdowns right in the middle of the busy travel season obviously left its mark. China’s services PMIs for August dropped below the 50 mark, although clearly not as much as during the initial covid-19 shock in Q1-2020.
The monthly activity data for August published yesterday also confirmed a further slowdown, with retail sales in particular much weaker than expected (driven down by services consumption). We now expect hardly any quarterly growth in Q3. We anticipate this to be followed by some payback and a pick-up in Q4, assuming further piecemeal support (see below) and with China reaching herd immunity by year-end (according to the National Health Commission). As a result of all this, we have cut our 2021 growth forecast to 8.3%, from 9.0%, while leaving our 2022 forecast unchanged at 5.5%.
Lack of passthrough producer price inflation leaves room for further piecemeal easing – After stabilising in recent months, producer price inflation edged up a bit in August, reaching a 13-year high of 9.5% yoy (July: 9.0%). A closer look shows that price pressures are mainly concentrated in the commodity spectre and primary sectors. The PPI sub-index for means of production rose by 12.7% yoy in August, driven by mining and raw materials industries. By contrast, the rise of the PPI sub-index for consumer goods remained at a low 0.3% yoy. Meanwhile, both headline and core inflation came down a bit in August, reaching 0.8% yoy (July 1.0%) and 1.2% (July: 1.3%), respectively.
As a result, the gap between PPI and CPI inflation has risen further to a new record high of 8.7 percentage points. With the passthrough of pipeline pressures to consumer prices limited so far, we expect the shift to piecemeal monetary and fiscal easing – that started with a 50bp RRR cut in July - to continue. We have penciled in another 50bp RRR cut by the end of this year. See for more background our China update, Downgrading our growth forecast on Delta, published earlier today. (Arjen van Dijkhuizen)